Dept of Labor data shows spike in productivity and dip in compensation

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Feel like you’re working a lot harder these days, putting in longer hours for the same pay — or even less? The latest round of government data on worker productivity indicates that you probably are.

The Labor Department said Tuesday that the American work force produced, at an annual rate, 6.4 percent more of the goods they made and services they provided in the second quarter of this year compared to a year ago. At the same time, “unit labor costs” — the amount employers paid for all that extra work — fell by 5.8 percent. The jump in productivity was higher than expected; the cut in labor costs more than double expectations.

That is, despite the deep job cuts of the past year, workers who remain on the payroll are filling in and making up the work that had been done by their departed colleagues. In some cases, that extra work came with a smaller paycheck.

The higher worker output and lower labor costs have been good news for companies struggling through the worst recession since World War II. So far, some 70 percent of companies in the S&P 500 have turned in better-than-expected profits for the latest quarter.

But wage cuts and lost paychecks could seriously jeopardize the recovery of a U.S. economy that still relies on consumer spending for two-thirds of its power.

“You have a very severely harmed, injured consumer in terms of income slow down, job uncertainly, job loss, wealth loss, inadequate savings, high debt levels,” said Laura Tyson, an Obama advisor who headed the Council of Economic Advisors in the Clinton administration. “The consumer, I don’t see powering us out of this recession.”

Many economists believe the current recession is on the verge of ending. And if, as many expect, the economy begins expanding again in the second half of this year, companies may begin adding more shifts and re-hiring workers as demand for their products increases.

That improving trend — a slowdown in the pace of the downturn — was confirmed in this month’s Adversity Index from msnbc.com and Moody's Economy.com, which measures the economic health of 381 metro areas and all 50 states. The index includes four components —employment, housing starts, housing prices and industrial production — and classifies each as being in recession, at risk, recovering or expanding.

So far, none of the areas is in the “recovery” stage. But according to the index, 85 metro areas are now in a "moderating recession" – up from 23 the month before.

“A lot of these places were contracting at a much faster pace in the first quarter than they are now,” said Andrew Gledhill, an economist at Moody's Economy.com, which prepares the index.

With job cuts slowing, corporate profits improving and the housing market showing signs of a bottom, many analysts are forecasting that U.S. Gross Domestic Product will turn positive again this quarter after a sharp over the past year.

Not so fast, say other analysts.

“I think there's a lot of risks ahead," said Larry Lindsay, a private economist and Director of the National Economic Council under the Bush administration. “We still have a consumer balance sheet that needs repaired. We still have problems in the housing sector. We still have ultimately to get out of a massive amount of fiscal stimulus, a massive amount of monetary stimulus. And I agree with (Fed Chairman Ben Bernanke) those are technically possible to do. But they are not painless things to do. So I do think there a little bit of ebullience out there.”

Higher productivity cuts two ways.

If we all get better at our jobs and use technology to increase how much work we can do in the same number of hours, our employers can afford to pay more and everyone’s living standard goes up.

The sharp drop in labor costs last month also makes it less likely that inflation will be a problem for the Federal Reserve — which has pumped over a trillion dollars of cash into the banking system to head off financial collapse. With inflation in check, that makes it easier for the Fed to keep interest rates low without sparking another round of inflation.

“The combined efforts of workers and business to grind out solid productivity gains through the recession is unequivocally good news — an underlying reality of solid fundamentals that has been overlooked by the economic doomsayers and naysayers for many months,” said Brian Bethune, an economist at IHS Global Insight, in a research note Tuesday.

But this round of productivity gains has a darker side. The recent round of strong corporate profits, even as sales have fallen, came mostly from aggressive cost cutting that included huge rounds of layoffs and, for some employees still on the payroll, cuts in hours and wages. Some 7 million works have lost their jobs since the recession began in Dec. 2007. After healthy gains in the second half of last year, hourly compensation has dropped 2.2 percent so far this year — though it bumped up two-tenths of a percent in the second quarter.

Companies have also been slashing inventories to avoid getting stuck with unsold goods. If demand picks up again, rebuilding those inventories could provide a big boost to employment and wages, as companies begin to ramp up again to restock. But it remains to be seen when, and how strongly, that pickup in demand will happen.

As paychecks evaporated and work hours shrank during the recession, Americans have hunkered down and begun saving more. The personal savings rate slipped to 4.6 percent in June, after rising to 6.2 percent in May, but it was still well above the 1 percent rate in 2008.

Higher savings will help rebuild batter retirement accounts. But it also creates a headwind for a pickup in consumer spending. That's troubling when you combine it with lower incomes, which are the engine of future spending. Personal income fell 1.3 percent in June, the steepest plunge in more than four years.

Businesses have also been cutting new investment to the bone until they see convincing signs that the recession is finally over and sustainable growth is picking up. Others are hoarding cash to help them weather the ongoing economic storm.

“Right now we have to worry about enough demand in the economy,” said Tyson. “So if the private sector, particularly consumers, are going to be increasing their savings rate, for every dollar they receive they're going to be spending a little less and saving a little more.”

Lower wages and higher savings leaves less money to buy the goods and services that will create demand. In the past, consumers who saw their household budgets squeezed managed to pay the bills by borrowing against their home equity or by running up credit card balances. But those options are available for fewer and fewer consumers.

“What our contacts tell us is that we probably have another round of credit card and consumer credit restriction coming,” said Lindsay. “And those (restrictions) have still not caught up to the rise in the unemployment rate and to the decline in FICO (credit) scores. … So I think we're probably in the fall going to see another round of credit tightening.”

And that means companies will continue to try to squeeze more out of fewer workers.